Tax reform? Here's how Alabama compares to the rest of the Southeast (Guest Opinion)

A national organization has deemed April 9 "National Stand Up For Transportation Day," and is calling on events across the country to raise awareness of the transportation funding dilemma. So far, plans are under way for an event at the state capitol in Montgomery and in Birmingham.

(AL.com file photo)

Tom Spencer, senior research associate, Public Affairs Research Council of Alabama

The shortfall has been present for years but has been papered over by stimulus funds, borrowing, and a variety of one-time windfalls. It's been coped with by cutting the state workforce and curtailing state services. But, as 2016 approaches, the state's lack of adequate revenue is apparent.

Alabama has the lowest state and local tax revenues in the nation on a per capita basis, according to recently released figures from the U.S. Census Bureau. We expect governments here to provide services competitive with those provided elsewhere, but we have less money available to support those services.

The Public Affairs Research Council of Alabama first performed this analysis in the late 1980s. At that point, Alabama ranked No. 48 in per capita taxes, ahead of Arkansas and Mississippi. By the early 1990s, Mississippi and Arkansas had moved ahead and since then, Alabama has maintained its No. 50 ranking.

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Our lowest-in-the-nation ranking in revenue results from two factors: tax rates that are lower than most other states and a base of wealth that is smaller than most other states. Alabama ranks at the bottom because it combines low tax rates and a small tax base.

In 2012, Alabama state and local governments collected a total of $14 billion in taxes, or $2,951 per resident. Across the U.S., the median value for state and local taxes per capita was $4,052.

Thus, the median state had a per capita tax advantage of $1,102 over Alabama. Put another way, if Alabama collected taxes at the per-capita rate of the median state, local and state governments here would have an additional $5.3 billion to spend building and maintaining roads, providing police and fire protection, operating civil and criminal courts, supporting schools and colleges, libraries and parks, and the myriad of other functions government performs.

National comparisons aren't always convincing because of regional economic differences. But Alabama stands out even in the Southeast. State and local governments in every surrounding state have more money to work with on a per capita basis.

To quantify the tax revenue advantage enjoyed by other states, Alabama's per capita tax rate is compared to other states and the difference is then multiplied by Alabama's population.

Closest to Alabama is South Carolina, which collects $69 more per capita than Alabama does. If Alabama collected taxes at the same per capita rate as South Carolina, governments here would have an additional $334 million to work with. At Mississippi's per capita rate, Alabama would have $1.5 billion more to spend. At North Carolina's per capita rate, Alabama state and local governments would have an additional $2.8 billion to spend providing services.

Another way of looking at state and local tax burdens is by comparing tax collections to measures of income or economic activity. Alabama ranks No. 46 in the country when its tax collections are compared to the state's total personal income. In Alabama, state and local tax collections amount to 8.2 percent of personal income. The median value among U.S. states is 9.7 percent. On this measure, the only Southeastern states that rank behind Alabama are Florida and Tennessee.

Another way of measuring the tax burden is to calculate tax collections as a percent of each state's gross domestic product (GDP), a measure of economic output. Alabama tax collections amount to 7.5 percent of GDP. The U.S. median for taxes as a percent of GDP is 8.5 percent.

Comparing the tax mix

Every state has a unique blend of taxes. Most states depend on some combination of the three principal tax sources: income, property value, and sales transactions (what we earn, own, buy). A tax system that is balanced among these three sources promotes fairness and stability. A sound tax structure avoids placing too heavy a burden on any particular group of taxpayers. Most states take measures to protect households with low incomes from taxation in hopes of encouraging economic advancement.

Alabama's tax system is not balanced. Taxes fall more heavily on some groups of taxpayers than on others because of the mixture of taxes we have chosen and the way those taxes are applied. As lawmakers consider options for adding tax revenue, questions of balance and fairness should be considered.

Property taxes: Alabama's state and local property taxes are the lowest in the nation on a per capita basis. If Alabama doubled its per capita property tax collections, they would still be well below the national average.

Adjusting property taxes could help balance the state's tax structure. But almost any change to property taxes would require a change to the Alabama constitution, requiring approval not just from the Legislature, but also by a vote of the people. For the time being, there appears to be little interest in raising property taxes.

Income taxes: In 2012, Alabama's income tax revenue per capita ranked 36 out of the 43 states that collect income taxes.

Alabama's income tax stands out because most states set a higher income threshold than Alabama in order to allow poor households to keep more of the money they earn. In Alabama, the working poor start paying almost as soon as they start earning. A 2014 study published by the National Center for Children in Poverty found that Alabama imposed the highest income tax burden on poor families under various scenarios. Most states don't tax families at the poverty level and several have state versions of the earned income tax credit, which provides money back to working families to offset the bite from other taxes.

Meanwhile, Alabama is one of three states that allow taxpayers to deduct the full amount they pay in federal income taxes. Since upper income taxpayers pay a greater percentage of income in federal taxes, those higher earners get a larger break on Alabama income taxes.

The income tax rate and the deductibility of federal income taxes are both embedded in the Alabama constitution, so any change to the rate would require a constitutional amendment.

However, other state income tax deductions can be changed legislatively. Eliminating certain deductions or diminishing their value for those with high incomes would be one approach to increasing revenue generated by the state income tax.

Sales Tax: Alabama's per capita state and local general sales tax collections rank 31st among the 50 states. That's despite sales tax rates that are among the highest in the nation. According to the Tax Foundation, the combination of Alabama's state and local rates produces an average of 8.51 percent, the 5th highest rate among states.

Alabama's sales taxes are not as productive because of the smaller tax base and because Alabama's sales tax is narrow in comparison to most states. Alabama applies its tax to almost all sales of goods, including groceries and medicines, but it does not apply the tax to most kinds of services.

According a survey conducted by the Federation of Tax Administrators, Alabama taxes 37 out of 168 categories of services. The median state applies the sales tax to 55 different services.

Certain items are subject to special tax rates. The Census survey tracks collections for a number of these selective sales taxes. Alabama ranks high in per capita collections of taxes on alcoholic beverages and on public utilities, and low on per capita collections from motor vehicle licenses and tobacco products. Alabama's 42.5 cents per pack tax on cigarettes ranks No. 46. Only Georgia, Louisiana, Virginia, and Missouri have lower taxes per pack. The U.S. average per pack tax is $1.61.